This Huge Flaw in How Social Security COLAs Are Calculated Could Hurt Retirees in 2025

There has been much speculation about Social Security’s upcoming cost of living adjustment (COLA). While we’re getting closer to an official announcement for 2025, that information isn’t available yet.

The Social Security Administration plans to publish a 2025 COLA announcement on October 10. But based on what we know so far, it looks like seniors may end up disappointed with the number that’s released. There’s a reason for that, though, and it stems from a huge flaw in the way Social Security COLAs are calculated.

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An imperfect formula, to say the least

Social Security COLAs are calculated based on changes in the Consumer Price Index for Urban Wage and Service Workers (CPI-W) during the third quarter of the year. When the CPI-W increases from one year to the next, Social Security benefits increase the following year. When the CPI-W falls or remains constant, Social Security benefits remain the same.

Fortunately, Social Security recipients don’t have to worry about their benefits falling due to lower inflation. They can only go up. But even when they do increase, these increases often do not allow seniors to maintain their purchasing power from year to year.

The problem is that while the CPI-W can be a useful economic tool in its own right, it’s not the best fit for measuring the Social Security COLA. And all we have to do is think about what the CPI-W measures to understand why.

The CPI-W focuses on the expenses that working-age Americans in urban areas tend to incur. But Social Security recipients are mostly non-working retirees. Also, many Social Security recipients do not live in urban areas because they do not need proximity to jobs.

Because of these factors, the CPI-W does not adequately capture the costs that social security recipients tend to face. It also fails to highlight senior-specific expenses, such as health care, which tend to eat up a large portion of retirees’ Social Security income.

That’s why advocates have long pushed for a better way to calculate Social Security COLAs — using the CPI-E, or consumer price index for seniors. An index centered on older Americans is more likely to lead to better-performing COLAs.

But while we may see a change in how Social Security COLAs are calculated in the future, it won’t happen in time for 2025. As a result, seniors could find that next year’s COLAs fail them in a some measure.

Let’s hope things change in the future

It may be too late to set up Social Security seniors with a more generous and impactful COLA for 2025. But there’s no need to assume that a change like this won’t eventually trickle down.

For now, seniors on Social Security should know that the working estimate for the 2025 COLA is 2.5%. That number could go up or down a bit by October 10, though.

Whether a COLA of this size benefits seniors will depend on inflation trends in the coming months. However, a serious change is needed in the way these increases are calculated. Until that happens, seniors should try to prepare to be less dependent on Social Security COLAs.

A good way to do this is to find ways to generate income, either passively by investing or actively by joining the gig economy. Either step could take the pressure off those COLAs and lead to less financial stress when they’re overwhelmingly stingy.